Clough’s Forge sell-off leaves it in good stead

The share price of engineering
and project services company Clough
has doubled in the past six months. The forward momentum started in December when the company provided a trading update.

At that stage it indicated revenues of about $650 million were expected in the first half of 2012-13, and that a similar performance was expected in the second half. The company also said it was expecting earnings before interest and tax margins of 5.5 per cent, a strong performance in an industry that is capital intensive and very competitive.

Clough went on to deliver revenues that were broadly in line with forecasts, and margins of 5.8 per cent, well ahead of the 2.8 per cent that were achieved in the previous corresponding period. The company also substantially outperformed broker expectations.

The net profit of $43.2 million was well ahead of the $37 million that analysts at Macquarie were forecasting. The broker has maintained its “outperform" recommendation on the stock with a 12-month price target of $1.48, implying a price-earnings multiple of 13.8 relative to its 2012-13 forecasts.

Clough, which has substantial exposure to the chemicals, mining and mineral markets in Australia and Papua and New Guinea, appears to be poised for a period of strong growth on the back of several long-term oil and gas projects.

It has a leading position in energy and resources work that includes the PNG LNG Upstream Infrastructure project, as well as Chevron’s Gorgon and Wheatstone developments. The company’s order book was up by 34 per cent at the half-year mark, representing a record $2.5 billion.

Both Clough and Forge Group have benefited from an alliance that was triggered by the former reaching a 31 per cent interest in Forge following a failed takeover bid in 2010 at a share price of $2.10. Clough’s sale of its shareholding at $6.05 per share, realising gross proceeds of $187 million, is not just a lucrative windfall for the company, it provides substantial capital for its participation in existing and new projects.